11TH ACCOUNTANCY ACCOUNTING OF BUSINESS TRANSACTION – 1

Chapter – 1.    Recording of business transaction

1.1                       Accounting Equation

1)     What is an Accounting Equation? State its fundamental form. [NCERT]

An accounting equation is a mathematical statement showing that the total assets of a business entity are always equal to the total liabilities plus the capital (owner’s equity). It is derived from the Dual Aspect Concept of accounting.

2)     Why does the Accounting Equation always remain balanced? [NCERT]

The accounting equation remains balanced because every business transaction affects at least two accounts in equal and opposite measures (Dual Aspect Concept). Every increase in an asset is matched either by:

1. A corresponding decrease in another asset,
2. An increase in a liability, or
3. An increase in capital.

Hence, total debits always equal total credits, keeping the equation in equilibrium.

3)     Explain how revenues and expenses affect the Accounting Equation.

1.      Revenues / Income: Increase net profits, which accrue to the proprietor. Therefore, all revenues are added to Capital.

2.      Expenses / Losses: Reduce net profits and decrease the proprietor’s equity. Therefore, all expenses are deducted from Capital.

4)     Give one specific transaction example for each of the following scenarios:

(a) Increases an asset and increases a liability simultaneously.

(b) Decreases an asset and decreases capital.

(c) Increases one asset and decreases another asset.

Answer:(a) Purchase of office furniture on credit (Increases Asset: Furniture, Increases Liability: Creditors).

(b) Payment of staff salaries or rent in cash (Decreases Asset: Cash, Decreases Capital as an expense).

(c) Purchase of goods for cash (Increases Asset: Stock/Inventory, Decreases Asset: Cash).

1.2                       Using Debit and Credit

5)     What is meant by ‘Debit’ and ‘Credit’ in accounting? [NCERT]

• Answer:
• Debit (Dr.): Refers to the left side of a T-shaped ledger account.
• Credit (Cr.): Refers to the right side of a T-shaped ledger account.

The terms simply denote positions on an account and do not inherently mean “gain” or “loss.” Depending on the nature of the account, a debit or credit may represent an increase or a decrease.

6)     What is a ‘T-Account’? Describe its structure. [NCERT]

A T-account is a simplified visual representation of a ledger account shaped like the letter “T”.

1.      The title of the account is written at the top.

2.      The left side is called the Debit side.

3.      The right side is called the Credit side.

4.      It records increases and decreases in a specific asset, liability, capital, revenue, or expense.

7)     Explain the Modern Classification of Accounts and their fundamental Debit/Credit rules. [NCERT]

Under the modern approach, accounts are classified into 5 categories:

8)     State the fundamental rule of Debit and Credit for Revenue and Expense accounts. Why are they treated differently from Capital? [NCERT]

Expenses/Losses: Debited when increased; Credited when decreased.

Revenues/Gains: Credited when increased; Debited when decreased.

Reason: Revenues increase net income (which increases Capital, hence recorded on the Credit side). Expenses decrease net income (which decreases Capital, hence recorded on the Debit side).

1.3                       Books of Original Entry (Journal & GST)

9)     What is a Journal? Why is it called a ‘Book of Original Entry’? [NCERT]

A Journal is a basic book of accounting in which transactions are recorded chronologically (date-wise) for the first time from source documents.

It is called a Book of Original Entry because every transaction is first entered in the journal before being posted into the respective ledger accounts.

10)            What is meant by ‘Narration’ in a journal entry? Why is it essential? [NCERT]

A Narration is a short, descriptive explanation of the business transaction written at the bottom of each journal entry (usually starting with the word “Being”).

Importance: It provides immediate context and detail regarding why the entry was passed, making it easy to understand and verify during audits without referencing the original source document every time.

11)            Differentiate between a Simple Journal Entry and a Compound Journal Entry. [NCERT]

Simple Journal Entry: An entry that contains only one debit account and one credit account.

(Example: Cash A/c Dr. to Capital A/c)

Compound Journal Entry: An entry that involves more than two accounts—meaning it contains multiple debits, multiple credits, or both, for transactions occurring on the same date and of a similar nature.

(Example: Rent A/c Dr. and Salary A/c Dr. to Cash A/c)

12)            Explain the concepts of ‘Input GST’ and ‘Output GST’ and how they are classified in the books of accounts.

Input GST (CGST/SGST/IGST): Paid on the purchase of goods/services. It is treated as an Asset (debit balance) because it can be set off against Output GST liability.

Output GST (CGST/SGST/IGST): Collected from customers on the sale of goods/services. It is treated as a Liability (credit balance) payable to the government after adjusting Input GST.

1.4                       The Ledger & Posting from Journal

13)            What is a Ledger? Why is it called the ‘Principal Book’ of accounts? [NCERT]

A Ledger is a book containing a classified and permanent record of all transactions consolidated into individual accounts (Assets, Liabilities, Capital, Expenses, and Revenues).

It is called the Principal Book (or Book of Final Entry) because it provides a complete, summarized picture of every account in one place, allowing the business to ascertain net balances and prepare financial statements.

14)            Distinguish between a Journal and a Ledger. [NCERT]

15)            Explain the difference between Permanent Accounts and Temporary Accounts in the Ledger. [NCERT]

1.      Permanent Accounts: These are Balance Sheet accounts (Assets, Liabilities, and Capital). Their balances are carried forward from one accounting period to the next.

2.      Temporary Accounts: These are Trading and Profit & Loss accounts (Revenues and Expenses). They are closed at the end of the accounting period by transferring their balances to the Trading and Profit & Loss Account.

16)            What is meant by ‘Posting’? Briefly outline the process of posting from Journal to Ledger. [NCERT]

Posting is the process of transferring financial entries from the Journal into their respective accounts in the Ledger.

1.      Locate the specific account in the Ledger.

2.      For the debited account in the Journal, enter the date, write the name of the credit account in the Particulars column with the prefix “To”, and enter the debit amount.

3.      For the credited account in the Journal, enter the date, write the name of the debit account in the Particulars column with the prefix “By”, and enter the credit amount.

Record the Journal Folio (J.F.) page n